During a results briefing on Feb 5, Tony Tan, CEO of the manager of CapitaLand Integrated Commercial Trust (CICT), confirmed what many investors had been hoping to hear, that Singapore remains the main focus of his REIT. When asked where CICT is likely to invest geographically, Tan replied: “Our preference is Singapore to continue to increase our lead. We are leading the pack and we must make sure we run faster. The highest priority is here [Singapore].”
For FY2024, as of Feb 5, of the eight REITs that have announced either year-end or first-half results, two were able to report increases in interest coverage ratios (ICR) and declines in aggregate leverage. CICT’s ICR rose from 3x to 3.1x, while Keppel DC REIT’s ICR rose from 5.1x to 5.3x.
Interestingly, both REITs had equity fundraisings in 2H2024 of $1.1 billion each to acquire Singapore assets. CICT acquired the glamorous ION Orchard and KDC REIT acquired KDC SGP 7 and 8, which are less glamorous but a lot more accretive. The placement units of CICT and KDC REIT were oversubscribed, as were the preferential offers from both REITs.
CICT’s acquisition was completed on Oct 31, 2024 and the REIT has had the benefit of two months income from ION Orchard. KDC REIT’s acquisition was completed in December 2024 and should be able to reap the more than 11% pro forma distribution per unit (DPU) accretion. The DPU accretion from ION is a lot lower and likely to be below 1%. This is because the land lease of the KDC REIT acquisitions is 15.5 years versus around 80 years for ION. Hence, the net property income yield of the assets has to be higher to compensate for the lower land lease.
Minimum ICRs for all REITs
The Code of Collective Investment Schemes (CIS), which the S-REITs fall under, has been amended to streamline leverage requirements, including the definition of ICR.
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On Nov 28, the Monetary Authority of Singapore (MAS) made the reporting of ICR mandatory.
“To rationalise requirements, [an] ICR of 1.5x and a single aggregate leverage limit of 50% will be applied to all REITs with immediate effect. The previous requirement was that a minimum ICR of 2.5x was imposed only on REITs, which intended to increase their aggregate leverage from 45% to 50%,” MAS announced.
An important change is the definition of the ICR which takes into account distributions of perpetual securities. REITs need only to report one figure for ICR, which includes the impact of distributions to perpetual securities.
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Since MAS introduced the ICR into the financial reporting in 2022, REITs reported ICRs on a trailing 12-month basis and separately on an adjusted basis (adjusted ICR), which includes the impact of the coupon of their perpetual securities.
The previous requirement for REITs to have a minimum ICR of 2.5x before their aggregate leverage was able to exceed 45% (up to a maximum of 50%) was removed.
In addition to these new regulations, REIT managers will have additional disclosures that apply from March 31. REITs will need to disclose sensitivity analyses on the impact of changes in ebitda (the numerator in the ICR formula) and interest rates on the ICRs of REITs.
The sensitivity analyses should minimally include two separate scenarios, one based on a 10% decrease in ebitda and another based on a 100 basis point increase in interest rates, MAS says. REIT managers will also have to report on the outlook and management of their leverage and ICR levels in their interim financial result announcements and annual reports, MAS says.
Since the start of the reporting season in January, most of the S-REITs have included the MAS sensitivity tests with the two scenarios in their reporting.
On Jan 14, Lippo Mall Indonesia Retail Trust’s (LMIRT) manager announced that LMIRT “will potentially not be able to meet the minimum ICR requirement of 1.5x”. The main factors contributing to the low ICR are non-operational accounting adjustments made to both ebitda and interest expenses in the 2QFY2024 ended June 30, 2024, and the 3QFY2024 ended Sept 30, 2024, the manager says.
Where the ICR of a REIT has fallen below 1.8x, the REIT manager should take steps and/or have plans in place to improve the REIT’s ICR and disclose this additional information, MAS adds.
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Lendlease Global Commercial REIT announced that its ICR is at 1.5x. Although the ICR of 1.5x is close to the statutory threshold, LREIT’s ICR for bank covenants of 2.7x as reported in its results, should be well-buffered, DBS Group Research says in its update.
Managing noisy DPUs
Tan has always been very conservative in his guidance. On Feb 5, in a results briefing, he pointed out how income from various asset enhancement initiative (AEI) programmes and acquisitions, if there are any, are implemented to support DPU. In 1Q2024, CICT announced an AEI for IMM over three phases. Phases one and two were completed in 4Q2024. Phase three will be completed in the third quarter
“As we start looking at the 2025 and 2026 numbers, we can expect more contribution from IMM with the completion of phases one and two in 4Q2024. We look to completing phase three of the AEI in 3Q2025,” Tan says.
Although CICT’s unit base increased because of an equity fundraising exercise, DPU was able to increase, albeit modestly. This is despite the income from the acquisition not fully contributing to DPU till this year.
In 2HFY2024, for the acquisition of ION Orchard, CICT increased its unit base by 558 million units (including acquisition fees). Yet, CICT’s FY2024 DPU rose by 1.2% y-o-y to 10.88 cents. DPU growth in 2H2024 was flat at 5.45 cents. Since ION is a 50:50 joint venture, its net property income (NPI) will not count to total NPI and its contributions will be from a dividend payout to CICT.
“In acquiring ION and raising equity, which was completed in October 2024, we had a time lag difference with the enlarged unit base but without the corresponding contribution from ION,” Tan says. “On a normalised run-rate, DPU in 2H2024 would have been 5.52 cents and full-year DPU would have been 10.95 cents if everything matched.
The European Central Bank, which will be a tenant for 93% of the net lettable area of Gallileo in Frankfurt, will be progressively moving into Gallileo in the second half of this year. Gallileo has been empty since February last year when Commerzbank moved out after exercising its option to end the lease.
“For Gallileo, the work is progressing with no slippage in time and we expect to hand over the building progressively from 3Q2025 onwards. By 4Q2025, Gallileo could contribute revenue. We don’t anticipate distributable income from Gallileo this year but expect more substantial contributions in 2026,” Tan elaborates.
Gallileo’s lease does not include fit-out periods and lengthy rent-free periods despite its long 10-year lease. “We negotiated the incentive to even out throughout the entire lease tenure,” Tan says.
Last year, AEIs were completed on Clarke Quay and there will be a full year of contributions this year.
Similarly, Keppel DC REIT announced a modest increase in DPU to 9.451 cents in FY2024, up 0.7% y-o-y. This included its enlarged equity base but excluded the contributions from the new acquisitions. Its adjusted DPU on a “same-store basis” would have been 9.505 cents, up 1.3% y-o-y.
Elsewhere, Keppel REIT’s operating metrics appeared sound. Its FY2024 property income and NPI grew 12.2% and 10.7% y-o-y, respectively, supported by a couple of acquisitions in Australia, 2 Blue Street and 255 George Street. Rental reversions reached 13.2% for the portfolio and portfolio occupancy was 97.9%. However, DPU continued to fall, declining by 3.4% y-o-y to 5.6 cents for the full year.
Chua Hsien Yang, CEO of Keppel REIT’s manager, said during a results briefing on Jan 24 that the Singapore office, which comprises 77% of the REIT’s assets, remains “very, very, healthy. Demand is still strong coupled with low supply. I don’t see anything to worry about” when asked about rental growth and occupancy.
“I am very optimistic about the Singapore office market because there is no supply coming up. The consultants are looking at low- to mid-single-digit rental growth. In the signing rents for more premium buildings, we see $12+ psf per month and $14+ psf pm. Any new supply will take five years. Logically, with the limited supply, rents can only go up,” Chua says.
In his view, the big unknown is “how Trump’s policies affect the global economy”.
Narrowing the discount
When asked whether Chua has any plans for divestments and acquisitions, he replies: ”We‘ve done a review of the portfolio and we’re not looking to pare down stakes. We are not working on it, and no one is talking to me about it.”
Keppel REIT’s unit price is down 9.8% over a one-year period compared to CICT’s, which is almost unchanged.
Chua acknowledges that Keppel REIT is trading at a 30% discount to its net asset value (NAV) of $1.24. He says the market is still concerned about the REIT sector. “As long as we demonstrate that we are sensible in terms of how we approach our investment strategy, we are very clear in terms of how we approach the decision whether to remain in certain markets or exit certain markets. I think over time, what I hope to see is a change in the perception of Keppel REIT and our price will trade up closer to NAV.”
